Should You Be Concerned if Interest Rates Rise?

The national debt is still a major problem, but both spending as a percentage of GDP and annual budget deficits are moving in the right direction. Down. After peaking at more than $1.4 trillion in 2009, the forecast for this year is a deficit of about $830 billion, or 5.1% of GDP. At the same time, spending has fallen from over 25% of GDP at its peak to near 22%.

And if you want more good news, economist Brian Wesbury argues in a recent article, Rising Interest Rates Won’t Cause Fiscal Armageddon, that progress on the deficit is unlikely to be thwarted by rising interest rates. Noting that the average interest rate on marketable debt is now around 2%, Wesbury writes, “The Fed thinks short rates will eventually go to a 4% average while long-term rates rise to 4.5%. Let’s split the difference and say Treasury will eventually have to pay 4.25%, rather than 2%. If so, net interest, which is now 1.4% of GDP will rise to 3% of GDP, roughly the same as it was for much of the 1980s and 1990s, when the economy was doing quite well.”

He also points out that if interest rates increase, then the economy is probably stronger, meaning that tax revenue would increase as well. He writes, “So any boost in interest costs would be offset somewhat by higher receipts. For example, an extra 1 point in real GDP growth for only one year should add more than $30 billion per year in revenue.”

Wesbury concludes that of all our nation’s fiscal challenges, “the last one we should obsess about is a crisis happening when the economy is better and the Fed is finally raising rates. The pouting pundits of pessimism are over-reacting once again.”

That sums up my thinking exactly. Moving that thinking from the national balance sheet to your own personal balance sheet, there are always hundreds of excuses not to invest today.  One I hear quite often is the worry that our ballooning federal debt will create a financial hardship when interest rates increase. As Wesbury argues, I don’t think rising rates will cause a “Fiscal Armageddon.”

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